Global-e $GLBE: Powering Cross-Border Commerce for LVMH, Adidas, and Shopify
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There’s quite a lot of effort put into increasing shopper conversion online. Tobi Lutke started Shop Pay because he thought the existing online checkout hadn’t been intentionally thought through, resulting in a clunky process and abandoned shopping carts. Stripe’s pitch for its new Link product is that it boosts conversion rates by over 7%. Affirm argues that BNPL increases conversion rates without hurting brand perception or traditional, lower-fee, credit card sales.1 Global-e is another company in this general ‘boost conversion’ vein, although tackling a different surface area than the above 3 companies. Stripe and Shopify’s theses both center on the current checkout flow as inadequate and overly friction filled. Affirm’s thesis centers on solving affordability for a subset of the population that wouldn’t buy a merchant’s product otherwise. Global-e’s thesis is that D2C merchants aren’t set up well for international e-commerce. These merchants might receive a high level of international traffic, but a low percentage of this traffic ends up purchasing a product. Reasons for this abound, from lack of language localization to inadequate payment methods to complex return processes. Global-e aims to remove much of this complexity, and its offering can be divided into two categories:
Integrated Platform Solution (described as ‘Services Revenue’ on the income statement): Global-e’s platform solution is neither a website builder for international traffic nor a pure payments solution. Instead, it sits somewhere in the middle. Product prices are converted to the currency of the website visitor, banner marketing messages can be customized and displayed in the visitor’s language, and duties/taxes are calculated for the customer at checkout. Shipping options and payment methods are also tailored to the conventions of the customer’s country. It’s worth emphasizing that Global-e does not translate entire websites for its customers, only banner messages and the checkout page. The company charges merchants as a percentage of GMV, and its platform offering comes only as a bundle. The current take rate is a bit over 7%.
Fulfillment Services: self-explanatory. Fulfillment services is opt-in for merchants and has a higher take-rate at around 9%, but is lower margin than its platform offering. Global-e partners with DHL to provide this service.
While Link by Stripe increases conversion by 7%, Global-e often increases it by over 60%.2 The impressiveness of this figure explains why, similar to Samsara, the stock is up from its May 2021 IPO despite ostensibly looking like another expensive, unprofitable growth company. The reasons behind the massive boost in conversion were best explained by management on its first earnings call as a public company:
“We typically see around 30% of e-commerce traffic being international. But this is where the music stops for many of the merchants. When you look at their actual sales figures, typically no more than 5% to 10% come from international shoppers. In other words, many merchants are not able to convert this enormous international traffic into actual sales, leaving a lot of money on the floor. This is because of the many structural barriers that stand between them and their international shoppers, who rightfully expect a seamless and localized shopping experience.........but localizing the experience for even a single market is painful and difficult. A merchant needs to support the local language, present attractive prices in local currency, support the local payment methods that are prevalent in that market, offer a compelling shipping and delivery experience, guarantee a full landed costs including all relevant import duties and taxes and more. Now multiply these challenges by 50 or 100 markets, it becomes nearly impossible to overcome” (Q2, 2021)
The obvious conclusion to draw from this is that setting up a storefront to sell effectively to international customers is somewhat of a herculean task, even for an enterprise business. The process sounds not unlike Tobi Lutke’s experience setting up an online snowboarding store in 2004, which has interesting implications for Global-e’s TAM. Shopify’s addressable market was unclear at the company’s outset both because people weren’t yet fully comfortable with the internet and because it was overly complicated to set up a business online. The easier Shopify made it to set up a business online, the more people actually did it, and the greater Shopify’s TAM became. The same can be said of Global-e. The easier it is for merchants to sell internationally, the more merchants will actually do so. This makes calculating the company’s opportunity difficult, and so analysis that claims Global-e’s share price is overvalued purely based on its addressable market should be met with some skepticism.3
The Data Network Effect
There’s a tremendous amount of value in Global-e’s data, which management is keen to emphasize. A section of the company’s F1 reads:
“The scale and sophistication of our platform rely on the data and insights we have accumulated since our founding more than seven years ago. We refer to the application of our data as “Smart Insights” – country-, price-point- and vertical-specific lessons learned about shopper behavior. These insights are expanded every time a potential shopper enters a merchant’s online store – which occurs hundreds of millions of times each year – allowing us to gather additional data points along the purchasing journey. We believe that by leveraging our Smart Insights, merchants can provide highly-optimized experiences for shoppers on a per-market, per-vertical and per-price point basis, driving increased sales conversion and revenues. By providing a superior and seamless shopper experience and empowering merchants to capture the global e-commerce opportunity, we believe that we drive more transactions and thereby accumulate more data, which in turn increases the quality and depth of our Smart Insights. This creates strong flywheel effects that further power our business and that of our merchants.”4
Global-e’s data piece gives it a few different advantages. Firstly, the more data Global-e has, the better it understands how to convert website visitors into customers. The more visitors it can convert, the more its merchants succeed, and so the more Global-e succeeds. Over time, competing with the company becomes not only a question of replicating its features, but also of accumulating a similar amount of data. All else being equal, the company with more shopper data will deliver a better conversion uplift, just as the web browser with more search data delivers more relevant search results. This also has implications for the ‘build vs buy’ question. Although it would be a massive time drain, a potential enterprise customer could in theory hire an engineering team to approximately replicate Global-e’s platform solution. What could not be copied, however, is the data. Put another way, building out internal cross-border e-commerce capabilities would require a vast amount of effort for a lower shopper conversion uplift than what Global-e offers. This differential in shopper conversion becomes even more relevant when the majority of an enterprise’s competitors are using Global-e. As a luxury brand, LVMH benefits from the data exhaust Global-e receives from other luxury brands. The more luxury merchants GLBE serves, the more data it has on converting luxury shoppers, and the more all companies in that vertical benefit. A luxury brand not using GLBE, however, can only benefit from its own internal data in its cross-border efforts. The result is akin to Peacock or Paramount attempting to build out a recommendation engine for its subscribers: it’s doable, but no one would claim they know how to merchandize titles, and thus increase time spent on the platform, like Netflix does. The final point to make here is that, over time, the data piece gives Global-e a meaningful amount of pricing power. Merchants can’t credibly threaten to build internally because it would come at the cost of hurting their own success. Direct GLBE competitors can offer a lower price point, but without a similar amount of data they can’t drive the same conversion uplift.
Revenue Mix, Margins, and NDR
The balance between Global-e’s fulfillment and integrated platform revenue has shifted over the past four years as its customer mix has changed:
At the time of IPO, Global-e was predominantly serving mass market beauty and fashion companies. Since then, the company has expanded more into the luxury vertical, while also adding merchants that are handling fulfillment themselves. As one would expect, the luxury market sells items with higher average order values than mass market beauty. Because GLBE takes a cut of all transactions, more luxury brands as customers means service revenues per item tick up while fulfillment revenues per item stay about the same. The company has also brought on merchants that already have fulfillment capabilities internationally, but want to use GLBE to power their D2C efforts abroad.5 For example, Adidas is using the company’s platform solution but has plenty of warehouse space overseas, and so understandably opted out of fulfillment services. While both of the above changes to the business increase services revenue and so lower the company’s take rate, they boost overall gross margins.6 This is another metric that has changed meaningfully, going from 29% in 2019 to 41.2% for the most recent quarter. Management, likely intentionally, doesn’t give a terribly insightful answer when asked for the reasons behind this margin expansion, instead citing general economies of scale, improved operational processes, and occasionally pricing optimization. That being said, economies of scale is a good answer on the fulfillment side: Global-e sending more volume to DHL quickly results in better pricing. Over the longer term, Global-e’s CFO expects margins to sit at around 50%.
NDR has remained strong over the years:
These figures are impressive, particularly given the ecommerce slowdown that occurred post-Covid. For the most part this net dollar retention is explained by very large merchants deploying Global-e’s solution into more international markets. The majority of Global-e’s customers launch in all available international markets when they begin using its platform solution. The largest customers, however, launch one international market at a time or one company brand at a time. These large merchants make up a small portion of the company’s logos, but a large portion of GMV and thus revenues. A consequence of this is strong NDR when the platform delivers. So far this has been the case, with companies like Marks & Spencer adding additional markets for six consecutive years, and LVMH continuing to add more of its brand portfolio or markets seemingly every quarter.7 Optimistically, a portion of this net dollar retention is explained by Global-e’s data insights continuing to improve, resulting in greater conversion and thus merchant success, but I don’t have any hard data to back that up.
Shopify Partnership
A portion of the excitement about Global-e has been related to its partnership with Shopify, and for good reason. Shopify Markets and Shopify Markets Pro, both cross-border commerce solutions, were only launched in late 2021 and 2022, giving Shopify limited time to develop competence in this area of the ecommerce world. Global-e’s mission to enable cross-border commerce for D2C merchants is basically another way of saying we want to serve the same customer segment that Shopify does; this partnership limits the corresponding competitive threat, validates that Global-e has built something valuable, and provides GLBE with a distribution channel that is hard to beat. It also explains the company’s acquisition of Flow Commerce, a cross-border ecommerce solution for emerging brands. At the time of its IPO, GLBE primarily served established companies, which while important for Shopify are hardly its raison d’etre. Buying the capability to serve smaller brands would’ve been a smart move anyway, but particularly so when it means accessing more of Shopify’s merchants. This partnership is still in its testing days, with Shopify Markets Pro currently in Early Access only. Global-e management expects to see some revenue benefit start to materialize in Q4, and for growth to really pick up in 2024. There should also be some benefit to Shopify’s own numbers once the partnership ramps, both for its cross-border sales and overall GMV. The former currently sits at around 15% of the latter, a percentage that should grow as GLBE increases conversion. Predicting SMB uptake of a product is no easy task, and there’s a case to be made that the Shopify-GLBE will ramp faster than anticipated, leading to revenue surprises for both companies.
Risks
A potential concern for the business is that D2C commerce is a temporary trend rather than a secular one, especially given Nike’s recent announcement that it’s going to put less resources into the channel going forward. There’s little evidence of this affecting Global-e’s business now: the company’s strong NDR is driven by enterprise customers ramping up, rather than ramping down, D2C operations. Moreover, it’s unlikely that this is a risk on the emerging brand side. If I’m a small business owning a customer relationship is, most of the time, a lot more valuable to me than having that relationship intermediated by Amazon. There have been some other concerns raised on the sell-side about the business, but they’ve been remarkably short term in nature. The post-Covid shift from goods to services may have slowed down the company’s growth, but not enough to hit the business fundamentals hard. An upcoming slowdown in the luxury market might also affect growth, but that’ll be crowded out by continuing enterprise expansion/Shopify Markets, and only seems relevant if you’re playing the quarterly earnings game at a pod shop. Management has received some questions about the macro backdrop/health of the consumer on earnings calls, but that’s an odd question for a business growing this fast, and again is indicative of a strangely short-term orientation. The most legitimate concern for the business is its valuation, which sits at 26x next year’s gross profit. There’s a lot of growth baked into that price; should it temper faster than expected it’s hard to see the stock going anywhere but down.
Disclaimer: The information in this post is not intended to be and does not constitute investment or financial advice. You should not make any decision based on the information presented without conducting independent due diligence.
Some merchants don’t want to put items on sale for fear it hurts the perception of their brand. BNPL is a way to keep prices the same but still enable a new customer segment to purchase from you.
On a related note, Bill Gurley of Benchmark fame wrote a great piece on why one shouldn't estimate Uber’s TAM based on the existing taxi market that can be found here.
Pg 48. Global-e F1 filing.
On earnings calls Global-e management refers to this offering as ‘multi-local.’
Global-e has also made a foray into the consumer electronics space, adding brands such as Jabra. This vertical increases margins for both of the above reasons: merchants have often opted for the multi-local offering, and tend to sell higher average order value items.
This isn’t an understatement. Global-e has added an additional LVMH brand every quarter since going public.